Short of money? Borrow

How easy it sounds, at some time in our life we have always felt the need to borrow, but then when it comes to repayment, we get stuck. One of the golden rules for borrowing is, borrow only if you are going to create a long term asset or the asset is going to increase your earning capacity. This sounds good, but then banks make some good offers for borrowing, some give low interest rates, some give loans with less paper work others pass the loan in a jiffy, all this is very tempting. We are bombarded with phone calls, SMS’s and emails from banks. Now we also have loan aggregators, who would allow you to compare loans for different purposes with interest rates and give you the best offers. HDFC Bank offers loan through net banking. Whatever the options, ultimately you have to repay. So take care and follow the following rules

Borrow only as much as you can repay. Ensure that your monthly outgo towards loan repayments (all loans taken into account) does not exceed 50% of your net income. Keep the repayment schedule as short as possible. The sooner you repay your loan, you will have surplus available to build other assets. If the loan period is longer, you end up paying interest for this longer period. We know it is tempting to increase the loan period, as the EMI would be lower. Remember that interest rates keep varying, today it might be low, but rates will go up as well and when they go up your tenure would go up. Ensure that you repay your debts on time, all lenders charge a penalty for delayed payment and add to it compound interest i.e. interest on the interest due and this is calculated monthly. If you delay, it also affects your credit profile. Making it difficult to get loans later when you would need it again.

Buy a term insurance equivalent to the amount of loan, so that if anything happens to you, your family members are not burdened with the loan repayment. Usually lenders would try to sell you a reducing loan insurance plan, but it is better to take a term plan and let it continue till your earning life. Whenever interest rates fall, search for better interest rates, because lenders do not offer better rates to existing borrowers. Last but not the least, read through every paragraph before signing the dotted line. Banks might say they are standard terms, but if you are not comfortable, do not sign.

Angel Investing

What is Angel Investing? It is basically investing in start-up's or companies which require funding but have no track record. The person giving this money is called an Angel or god sent. We keep hearing that many people have made money by Angel Investing. But not many tell how much they have lost. I am not sure if you are aware, but 70% of all start-up’s fail. Then why do people still invest? People invest because the return is so high that it covers up the loss incurred. So if you are interested, you should have a lot of money to take such risks. You just can’t invest in one venture and hope it gives you returns. If you are ready to take a risk, you really have to be strong hearted knowing fully well that there are 70% chances that you will lose money.

Remember that your returns could give you assured returns of around 16% if invested in good large cap mutual fund over a ten year period compared to Angel Investing over the same period where the return is not assured and chances of losing this money is high. Sometimes the returns could be good, but the waiting period could be long. So if you require money, there are chances you might not be able to get it back, even if the value has grown. But then if you still would like to gamble or take a bet, you need to do a thorough study before investing. Given the efforts required to do the research, many people find it better to invest in mutual funds. You need to research the idea, business plan, marketing plan and of course the management and if you are so good at this research, then you might as well as start the business yourself. 

There are sites which do this type of research for you for a fee. There are many sites which have become a meeting place for Angel Investors and startups for a fee. The cost of research is high, so many people just register on meeting places, which can give you an investment opportunity. But at the end of the day, Angel investing is not for the light hearted.